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High Stakes: Pot-related businesses face unique challenges

By Jordan Schrader, The News Tribune (Tacoma, Wash.)

Updated:
03/23/2014 06:32:41 AM EDT

Joe Hodas, chief marketing officer of Dixie Elixirs in Denver, points to a bottling system during a media tour of the company's new location, which is still under construction. (Kai-Huei Yau/Tri-City Herald/MCT) (Kai-Huei Yau)

Since that statistic first became a staple of news reports, medical marijuana dispensaries in Colorado have declined to half of their former numbers. Nearly 200 remain in Denver alone and nearly 500 statewide — still enough to make legal pot more pervasive than Egg McMuffins and Frappuccinos.

The stores were culled to that lower level after the state licensed and regulated them — suggesting that many of the people competing for the first-ever state marijuana licenses in Washington might not be in business in a few years.

Starting up any business is a challenge. Many fail. Now add the heavy regulations imposed on Colorado's medical and recreational marijuana sellers and Washington's new recreational industry.

“I think some of the people who initially had businesses, they didn't (pass a background check) or they couldn't put the money together or they couldn't prove where the money was coming from,” said Michael Elliott, the executive director of a marijuana trade association in Colorado, the Marijuana Industry Group.

Take just one category of expense, video surveillance. It's mandatory in both states.

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A typical Colorado grower and seller probably invested $20,000 to $30,000 in the startup costs of camera systems, Elliott said, with some spending 10 times that amount over the long term.

Add in secure entrances, occupational licensing, tracking the plants from birth to sale, he said. The point of all of it is to prevent the drug from leaking out to the illegal market. But all of it has costs, Elliott said. And then there's the question of where to keep the money.

Dixie Dust is a THC powder that can be sprinkled on top of marijuana to increase the potency while smoking. (Kai-Huei Yau/Tri-City Herald/MCT) (Kai-Huei Yau)

None of that has scared off hundreds of entrepreneurs from trying to strike gold.

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With the start of recreational sales in Colorado on Jan. 1, grower licenses being handed out this month in Washington, and medical marijuana expanding around the country, these are boom times. Plenty of people want in.

“Every single day somebody's asking for business advice or wants an introduction,” said Christie Lunsford, who made her own line of salves and other products for topical application of cannabis before becoming education and outreach manager for a larger Colorado manufacturer, Dixie Elixirs.

Lunsford spoke while surrounded by many of the participants in the gold rush, all networking and socializing in a downtown Denver bar.

More than 100 people showed up for an event organized by the National Cannabis Industry Association as a mixer for its members and a send-off for an employee.

The trade association added members at the rate of two a day in the first month of Colorado retail pot sales, deputy director Taylor West said. Its national membership rolls soared from 150 to 430 in the past year.

Many of the members gathered at Jonesy's Eat Bar had little or no direct contact with marijuana.

Amy Poinsett's company makes tracking systems. Andy Joseph makes the machines that extract highly potent oil from the plants. Brian Vicente's law firm does nothing but marijuana law. Jordan Dietrich has started a company he hopes will raise money to lend to businesses.

The further removed from the drug these companies are, the less risk if the market collapses, if the Department of Justice reverses its tolerant stance toward state-legal operations, or if voters rethink their growing acceptance. But so far, those trends are all moving in one direction.

Twenty states plus Washington, D.C., have allowed for medical use of marijuana, but only two, Colorado and Washington, have approved the drug for all adults 21 and older.

Table with icons comparing regulations on marijuana growing, purchase, licensing, taxes and local bans in Colorado and Washington state since the drug was decriminalized. The (Tacoma) News Tribune 2014

With BC-POT-HIGHSTAKES-1:TC, The (Tacoma) News Tribune by Jordan Schrader (Staff)

A Gallup poll last fall indicated for the first time in the history of the poll that a majority of Americans, 58 percent, backed legalization. Congress, though, has shown little interest in changing the law that makes marijuana federally illegal.

The conversation nationally has shifted dramatically, said Betty Aldworth, the industry organizer being feted here. She cited news media interest and statements from the Justice Department. She told the crowd the change has come because their industry has acted responsibly.

Association director Aaron Smith had just introduced Aldworth by saying that while she's leaving to run a legalization advocacy group, she's merely moving to another wing of the same movement.

And it's clear many in this room indeed see themselves as part of a movement.

“We're working to change the world, not just line our pockets,” Aldworth told the group, standing on a chair at the front of the bar, “and that's a beautiful thing.”

———

Still, many pockets will be lined.

The size of the legal Colorado marijuana market is poised to more than double in 2014 to $802 million, according to ArcView Market Research, a national network of investors.

Even that is less impressive than the fivefold increase predicted for Washington, which has much more room to grow because it doesn't have the large and regulated medical marijuana industry that Colorado does. ArcView anticipates a $316 million Washington market this year.

Colorado recreational marijuana stores are each seeing between 200 and 500 customers a day, Elliott said.

The first month alone saw about $14 million worth of recreational sales, according to tax collection data that showed the state collected about $2 million in revenue. State officials are predicting more than $117 million in revenue from retail marijuana will flow next year to state coffers.

Some in other states are beneficiaries of the ripple effects. Joseph, whose Apeks Supercritical manufactures the machines that make hash oil, is based in Ohio.

“We grew 245 percent last year over 2012,” Joseph said. And this year, “We already beat our quarterly sales goal — in the first three weeks of January.”

Medicine Man, one of Colorado's largest dispensaries, reports seeing about two and a half to three times as many customers as the 100 medical marijuana patients a day it had before Jan. 1.

The first two days of the year, the store had to turn customers away, said a consultant to the company, Elan Nelson.

Medicine Man is owned and operated by the family of CEO Andy Williams, who used to work for a company that provides air and sea navigational information.

Both its store and its 20,000-square-foot grow operation, soon to double in size, are housed in a building the company owns in an industrial park on the outskirts of Denver. Unlike Washington, Colorado doesn't allow outdoor grows.

The company employs 48 people and expects to have 70 workers after the expansion in April.

The company starts employees at a $10-an-hour probationary wage but declined to say what it pays on average. It offers paid vacation but no health benefits or retirement plan, at least not yet, Nelson said. Sean Norton, two years into his job, sees his employer as pretty fair.

“(I) never thought I could support my family doing something I love like this,” said Norton, a Medicine Man employee, husband and father.

Norton talked as he cleaned the glass enclosing the metal-halide lamps that bathe row upon row of plants in a blue-green glow.

This is the Vegetative Room. On one end of the long room are the mother plants. Huge, some reaching almost from floor to lights, they provide clippings that are cloned to make the plants that will be sold.

Tending to these “moms” is the job of Melinda White, a new employee. She waters them and keeps them free of excess foliage.

A self-taught botanist, White has worked in greenhouses and on herbal medicines but not in the marijuana industry until now, not least because she says her mother and stepfather work for the Department of Homeland Security.

“It wasn't until it became legal that I got interested in trying to grow it,” she said.

In Colorado, workers in the industry must pass background checks to receive an occupational medical marijuana license from the state, something Washington requires only for people running and financing the businesses. Colorado now has more than 6,500 active licenses.

———

The blue-green light in the Vegetative Room shines 18-24 hours a day to simulate summer and tell the young plants to keep growing.

Plants stretch down the room in various stages of growth. Some have the long, thin leaves of sativa-dominant strains — which tend to produce a more energetic high — and others the shorter, broader leaves of indica.

About 70 strains grow inside Medicine Man.

In this room, or “pod,” each plant is tagged for life in the state-mandated and company tracking systems. At the same time, it's designated for a spot in either the recreational or medical markets.

The tags will track them as they graduate to another pod, the Flowering Room, where the plants grow buds under red-yellow lights that shine for 12 hours at a time and signal autumn to the plants. Crystal-like structures called trichomes give the flowers a frosted appearance.

After harvest, they end up in the trim room, and what's snipped off there is hung up by its stems in the dry-and-cure room. The buds go into a bucket to cure. Nelson said that process targets the right balance between wet and dry that will best bring out their flavor.

A state contractor provides the tags, each with a tiny embedded chip. Scanning them with a mobile device, an inspector can learn how many plants should be in the room.

State regulators target some businesses that are deemed to be at high risk, others randomly, and all of them on a set schedule. Some inspections focus on compliance with packaging rules or some other specific area, said Lewis Koski, director of the state Department of Revenue's Marijuana Enforcement Division.

“What we're finding is that our licensees are putting in a good-faith effort to comply with all of the regulations that are out there,” Koski said.

If a business moves its products from one facility to another, they must log in the state system the inventory that is being moved, the route to be taken, the name of the employee who is transporting it and the license plate number of the vehicle. That also creates a manifest that can be shown to any police officer who might have questions after pulling over a truck full of marijuana.

If a shipment doesn't reach its destination on schedule, regulators see an alert.

Washington also tracks each plant from its origins in a seed or clone to the drug's retail sale, although it has a different contractor and some differences in the system.

Medicine Man has its own, duplicative tags since the company's system and the state-mandated system can't talk to each other.

In the warehouse's open area between pods, inventory control employee Amanda Roth scans one of the company's tags. The computer shows the plant's birthdate and the pod it's in, in this case the Vegetative Room.

Overhead, cameras peer down on Roth at her computer cart and on a worker pushing a vat of molasses-and-water solution. Nelson said it's used to flush nutrients from the plants so smokers don't taste them.

More than 100 cameras watch the operation inside Medicine Man, another visible sign of the cost of operating in this industry.

There are other signs. The armed guards from Blue Line Protection Group. The black bags that sold pot goes into. (It was no easy feat for the industry to find manufacturers of opaque and childproof packaging, West said.)

And even a simple device that would be taken for granted in any other kind of retail store: a credit card scanner.

Medicine Man had been able to buy credit-card processing services. Nelson said it comes with a higher premium to account for the risk in this line of business.

Accepting credit cards is a new development in the industry, said Elliott, of the industry group. He and regulators aren't sure how widespread it really is.

Banking is even more difficult. Banks are barred by federal law from accepting marijuana proceeds. Federal regulators have outlined a new process for reporting the customers and hinted they won't punish banks for dealing with legitimate and responsible pot sellers, but they have made no promises.

Colorado's state tax collectors have had to set up currency counters and secure an area to process cash deposits.

At least half of pot businesses pay taxes with checks, whether from their personal accounts or those set up under an affiliated company, said Ron Kammerzell, senior director of enforcement at the revenue department.

Medicine Man doesn't talk about its banking arrangements.

“I think about two-thirds of the businesses have accounts,” said Elliott of the industry group, “but the thing is, they're not able to use the accounts to the full extent.”

He said one member has about $1 million in cash she doesn't know what to do with. If she put it in the bank, Elliott said, it would raise red flags and she would lose that account.

That's another advantage of being an ancillary business, Poinsett said: For those who don't touch the plants, it's easier to access financial services.

Poinsett co-owns MJ Freeway, a software maker that helps marijuana companies around the country keep track of their inventories and point-of-sale transactions.

She may have picked just the right line of work to take advantage nationally as strict government-imposed requirements run smack dab into business owners used to other careers or to a more free-wheeling marijuana market.

“Most of them have not operated in a heavily regulated industry before,” she said.

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